Cass Sunstein and Richard Thaler argue in their recently released book "Nudge" that the "right to sue" (for negligence) available to patients, leaving doctors vulnerable to malpractice suits, has the effect of increasing insurance costs. However, they claim that there is enough evidence to prove that this liability does not provide any deterrent value and does little to protect patients from doctor's negligence. They therefore suggest that patients should be given the choice of waiving off their right to sue, and benefit by way of lower insurance premiums. I have two objections to this contention.
First, it is highly unlikely that insurance premiums are going to come down by foregoing this right. For a start, "right to sue" costs are not an itemized part of the insurance costs. Even assuming that the waival of such rights reduces the insurance premiums, it is most likely to result in sharing of only a very small share of benefits with the patients. In all likelihood, the insurance companies will end up knocking off a disproportionately larger share of the reduced costs. Further, those who opt to retain their right to sue will immediately experience an increase in their premiums.
The insurance companies would ultimately benefit in both ways - from a larger share of the reduced costs from the former and higher premiums from the later. In any case, the history and reputation of the health care insurance industry does not inspire any confidence that the benefits of reduced extent of insurance will be passed back to the patients.
Second and more importantly, any increasingly differentiated basket of claims in a market like that of insurance, which is characterized by information assymetry problems like moral hazard and adverse selection, will only end up increasing transaction costs and adversely affecting those who are most disadvantaged. It needs to be borne in mind that the most optimal (in terms of lowest transaction costs and insurance premiums) insurance market is one which covers everybody (the full spectrum of natural risks) and which does not offer differentiated services.
A differentiated services market will incentivize cherrypicking, thereby making it attractive for those with the wherewithal to mitigate the risks arising from foregoing the right to sue, will do so. In contrast, the vulnerable categories like poor, uneducated and underprivileged, end up being badly affected. In many cases, those requiring such insurance the most will get priced out of the market, thereby negating the very purpose behind the insurance scheme.
Critics will argue that such universalization-led absence of choice will be economically inefficient and militate against the principles of libertarianism. The arguement against this would be that the evidence from comparing universal with differentiated basket insurance markets conclusively points towards better outcomes in the former. After all there are significant social benefits and a net economic welfare to be gained by minimizing the uncertainties associated with lack of a universal health care insurance. Further, it is no more libertarian to make a few people better off, while making the large numbers of people worse off.
In other words, providing for dispensing with the right to sue, is more likely to be a nudge towards making the health care system surely more inequitable and ineffective, and most likely also economically inefficient.